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This paper investigates three questions in a poor and drought-prone region of western Orissa, India. Is aggregate income stable? How do a household's characteristics and its local environment influence both the level of its income and its variability? Does a short-lived, common shock cause significant income variability? The study is based on an original, three-season panel data set of 240 households, in which one monsoon season was marked by a severe drought. Aggregate income varied little, but there were considerable fluctuations in individual household incomes across seasons, the main sources of which were idiosyncratic shocks. This suggests that although current programmes are effective in stabilizing aggregate income against drought, massive additional intervention along the same lines is not an efficient way to combat a drought's effects. Rather, it is desirable to promote suitable insurance arrangements to deal with idiosyncratic shocks, measures which would complement those designed to raise incomes permanently. [ABSTRACT FROM AUTHOR]